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Markets Pulse

Asian Shares Fall as Focus Turns to Fiscal Cliff

By Sarah Turner, Chris Oliver

Asia stocks fell sharply Thursday, with Hong Kong slammed to its biggest single-session percentage loss in 3½ months, while Japan and China were also dragged lower as investors fretted about the impact of fiscal challenges in Washington and the potential fallout for Asian economies.

Japan’s Nikkei Stock Average fell 1.5%, while Australia’s S&P/ASX 200 index lost 0.7%, and South Korea’s Kospi dropped 1.2% after a late open.

The Shanghai Composite Index retreated 1.6% and the Shenzhen Composite was down 2.7%.

The Asia Dow was off 1.5%.

Kevin Lai, strategist at Daiwa Capital Markets, on Thursday forecast a negative print for third-quarter GDP in Hong Kong next week, with the data likely to show the city’s economy has shrunk for two consecutive quarters, technically marking a recession under way. Fundamentals in the Chinese city continue to deteriorate, according to Lai. He warned of “event risk” arising from the Nov. 16 economic release: the prospect of a sharp correction in stocks. Meanwhile, in Beijing a weeklong conference to usher in China’s next leaders and policies kicked off Thursday, although as yet there was little clarity on content or timing of any announcements.

But with U.S. voters choosing President Barack Obama over challenger Mitt Romney, who had taken a harder line on China, Sino-U.S. relations now looked less likely to sour further. As well, economic reform may be easier for the Chinese government with an Obama administration. Jun Ma, China equity strategist at Deutsche Bank, said that policies such as liberalizing the financial sector, opening up the capital account and greater yuan flexibility are likely to progress more smoothly as they “can be more easily carried out in a friendly international environment.”

Barry Knapp, strategist at Barclays Capital, said that the U.S. election broadly maintained the status quo of a polarized federal government and that U.S. fiscal policy “remains problematic for risk sentiment.” He highlighted risks to U.S. economic growth from potential tax increases, which he said the market wasn’t discounting. “This leaves Asia, particularly China, in a difficult spot,” Knapp said. “European demand is weak, and if U.S. demand also softens, the recent signs of stabilization—which we think may have been flattered by smartphone product launches—could fade, leading markets to expect another leg lower for global growth.”

Bank of America Merrill Lynch economists said that the impact of U.S. decisions on the fiscal cliff in terms of Asia markets would depend on how severe it gets. “I look at Asia, and I look at emerging markets in general, and I see a much healthier environment” than in the West, said Ethan Harris, co-head of global economics research at the bank, during a recent news conference in Hong Kong. However, the beginnings of any economic re-acceleration in these emerging markets would likely level off in an environment that included very weak U.S. growth, the economists say.

A Bloomberg News report said LG Electronics, along with Japan’s Panasonic Corp. could face fines from the European Union for allegedly fixing cathode-ray-tube prices. Shares of Panasonic lost 0.3% in Tokyo.

Meanwhile, other Tokyo-listed exporters fell, with the dollar buying ¥79.94 Thursday, down from ¥79.98 late Wednesday and from ¥80.36 Tuesday.

Strategists at Bank of America Merrill Lynch said dollar-yen positions remained sensitive to U.S. fiscal-cliff scenarios. “Long [U.S. dollar vs. yen] is extraordinarily so, being predominantly driven by rate differentials,” they said, adding that “recent appreciation in dollar/yen could reverse.

Also weighing on the Hong Kong market, casino operator Galaxy Entertainment Group Ltd. fell 4.4% after Permira sold its 5.9% stake in the firm. Rival Sands China Ltd. lost 2.9%.

Lenovo shares retreated 2.7% in Hong Kong after the computer maker said its second quarter net profit climbed 13% to $162.1 million, exceeding analysts’ forecasts of $154.6 million according to Dow Jones Newswires.

Growth-tied resource firms fell after sharp losses for most commodities in New York on Wednesday, where crude-oil futures dropped almost 5%.

In Hong Kong, Aluminum Corp. of China fell 3.1%, and PetroChina Co moved lower by 3%.

Energy and material-sector firms also weakened in Australia, with Oil Search Ltd down 1.2% and Rio Tinto Ltd. giving up 1.1%, while Fortescue Metals Group Ltd lost 2.7%.

Meanwhile, data out Thursday highlighted Japan’s economic problems, with core machinery orders down by a larger-than-expected 4.3% in September.

In separate releases, the Finance Ministry said September’s current-account surplus narrowed by a sharp 69% to an unadjusted ¥503.6 billion ($6.4 billion), below a projection from Nikkei and Dow Jones Newswires for a ¥762.3 billion surplus.

Economists at Capital Economics said that a brewing territorial dispute with China, which began “in earnest” in September, had “contributed to a large fall in exports and industrial production during the month. This is likely to have affected investment intentions, and will therefore have weighed on machinery orders.”